How to woo more and more Chinese investors

The incumbent government – soon after it came to power following the 2018 general elections – set its priorities in relation to the China Pakistan Economic Corridor (CPEC). It was a paradigm shift from the country’s earlier focus on mega projects in the power sector and infrastructure projects to a revised focus on populating the many Special Economic Zones (SEZs) being set up in the country under the CPEC. This change, more in favour of Pakistan than in China’s, was driven by Pakistan’s woefully mounting debt plus the de-industrialisation and rising unemployment due to lack of local value-addition in mega projects established under the CPEC and the country’s market dumped with relatively cheap Chinese products.

To populate the SEZs with foreign and even local investment is a serious challenge. For years, Pakistan’s Foreign Direct Investment (FDI) has been hovering around $ 2 billion and in recent years mostly out of China. FDI out of Europe, the Japan, the UK and the USA has dried out. The hard fact is that the country’s economy or market is now perceived as China-centric and this perception is not likely to change in the foreseeable future. Getting back into the arena of the countries competing for FDI is a humongous task. It requires drastic and dramatic reorganisation of our institutions, processes and systems. They are all obsolete and need to be re-worked and aligned with those of the emerging markets who have excelled in attracting FDI. The best bet for Pakistan, at this time and under the given constraints, is to work on China to attract FDI.

Sometime ago China had indicated that it wanted to move some segments of its industry to SEZs for re-export from Pakistan and to feed Pakistan’s domestic market. Unfortunately, however, nothing in this regard has happened on ground so far nor are there any signs of it happening anytime soon.

Many industries in China are being constrained to move out of the country due to overcapacity, rising production costs, and environmental compulsions. These include copper and aluminum smelting, cement, papermaking, textiles, iron and steel, light engineering, and low-end motors and machines. The Chinese garments and textile industry seems to be the right choice for relocation in Phase-I.

Much like the story of Japan, China, too, has graduated from a low end to a high end technology driven and a prosperous market. Understandably, it is now facing a surge in production costs owing to appreciation of its currency, higher cost of raw materials, etc. Moreover, as Chinese labour is graduating from low-paying to high-paying jobs, along with the introduction of improved labor laws, labour costs have risen sharply. The average labour cost of an operational hour in the coastal and inland regions of China is thrice the cost in Vietnam and Pakistan and six times that of Bangladesh.

The decision to relocate an industry to another country is driven by the criteria if such relocation offers substantial advantages in regulatory framework, ease of doing business and cost of doing business which entails reduced transportation time due to proximity to raw materials and existing markets, domestic market size, re-export potential, utilities and raw material input costs, labour cost and productivity.

One has to understand that China is a country which means business. China’s meteoric rise as one of the two largest and strongest economies of the world is based on the philosophy of ‘ Business First and Last’. China has a soft corner for Pakistan and may make some arguably cosmetic investments in this South Asian country. But to mobilise substantial and strategic Chinese investment, Pakistan has to offer all the competitive advantages as are being provided by countries where Beijing is already relocating its industry. This is where sincere and substantial work needs to be done.

(The writer is former President, Overseas Investors Chamber of Commerce and Industry)

Copyright Business Recorder, 2021